Over the holidays, did you host a family gathering and wonder ‘Do we really need a home this large when we only use all the rooms once a year?’. Or did you daydream about what your ideal retirement home could look like? Closer to the grandkids, easier to maintain, or perhaps nestled by the coast with water views to wake up to.
Upsizing, Family-sizing, and the Age Pension
Most people know that the family home is exempt from the Age Pension assets test, regardless of its value. So, you could live in a stunning $6 million home, but still struggle to pay the electricity bill, rising insurance premiums and ongoing maintenance. In such cases, downsizing makes sense: sell the home, buy something more affordable and free up funds to support your retirement income.
But what if downsizing doesn’t leave you with that much of a financial buffer? In many areas, especially where median house prices are climbing, the difference between selling your home and buying something smaller can be minimal. The reality is that moving to a new home, even a smaller one, could cost you more than you’d expect.
Research from the Australian Housing and Urban Research Institute (AHURI) highlights that many retirees prefer to remain in their existing home rather than downsize. In fact, in 2022 AHURI found around 60% of owner-occupiers aged 65 to 74 years have stayed in the same dwelling over a 15-year period.
While downsizing is often promoted as a solution, the availability of suitable homes in desired areas is not always guaranteed at a price tag that would leave you with leftover funds. According to the Australian Bureau of Statistics (ABS), the median house price of a residential dwelling in Australia rose to $985,900 last quarter – September 2024. For retirees wanting to move, upsizing might be the best option for them to weigh up, and for others, renovating can offer a practical alternative to changing homes or locations.
We have also had a number of members recently asking us about how moving in with family in a granny flat arrangement would affect their Age Pension entitlements. For some, modifying their home to suit extended family arrangements is a smart way to ensure comfort and security while staying connected to family.
Could upsizing, renovating or ‘family-sizing’ your home be a better fit for your needs? And what effect might these choices have on your Age Pension entitlements both now and in the future?
Increasing your Age Pension with an upsize
Cathy and Paul owned a double-storey home in Adelaide worth $700,000, but as they got older, the steep sloping block and stairs became harder to manage, not to mention the garden up-keep and yearly hassle of keeping the leaf litter from the eaves. They decided to sell and move to a single-storey, low-maintenance home that offered more comfort and accessibility.
To make the move, Cathy and Paul withdrew $75,000 each from their Account-Based Pensions to help fund their new $850,000 home. While this reduced their superannuation balance, it also meant their Age Pension increased by $11,700 per year.
While their fortnightly Age Pension income increased, the long-term forecast showed a significant impact to their overall wealth long-term. They would need to draw from their reduced superannuation balance of $450,000 to meet their income needs above what the Age Pension will provide. Besides their super, they had a $50,000 cash buffer in the bank and $60,000 of personal assets. Our retirement forecasting tool showed they would likely need to adjust their spending levels from $75,000 to $65,000 per year in later years of retirement to make their funds last to age 95.
Renovating can unlock entitlements
Maree is a single homeowner with $425,000 in superannuation. She loves her home and wants to stay there, but realised it could use a few updates to make it more comfortable for her retirement.
Maree estimated $50,000 in renovation costs, including installing hand rails in the bathrooms, and remodelling the driveway and front steps. Since the Age Pension reduces by $3 per fortnight for every $1,000 of assets, the renovations will increase Maree’s Age Pension by $3,900 per annum. The Retirement Essentials Retirement Forecasting tool showed Maree that she could safely spend at a level of $48,000 each year and that her combined super and Age Pension benefits are likely to support her through to age 95.
No one-size fits all:
Exploring the granny flat option with extended family
A granny flat interest gives someone the right to live in a private residence for life, paid for through funds or property transfer. Unlike the common real estate definition, it doesn’t require a separate dwelling. The arrangement can work regardless of family relationship. While it may be a traditional standalone pod or unit in the backyard, it could also be a section of a large family home, such as a private wing with an ensuite and sitting room for a grandparent or older relative.
Centrelink assesses the value of this interest to determine its impact on payments, assets, and homeowner status. You will need to tell Centrelink how you created the interest and how much you transferred or paid, for their assessment.
Key considerations include:
Value assessment: The amount paid or transferred is used to calculate the value of the granny flat interest and if you have paid more than the interest is worth. Centrelink applies the reasonableness test if extra assets are transferred or if no construction/renovations occurred, determining whether the arrangement involves deprivation of assets (gifting).
Homeowner status: Your status depends on the value of the granny flat interest. If your payment or contribution exceeds the extra allowable amount (currently $252,000), you’re considered a homeowner. Homeowners cannot access Rent Assistance, while non-homeowners with contributions below this limit can.
The rules in action:
Let’s say Martha,74, sells her home and moves into an existing property in Brisbane owned by her daughter. She pays $680,000 from the net proceeds of the sale of her home in exchange for the right to accommodation for life. Centrelink’s reasonableness test sets the value of the granny flat interest at $605,542, so the excess is considered a gift. As the amount Martha paid exceeds the current extra allowable amount, she continues to be considered a homeowner.
You can find some common examples of granny flat arrangements assessed by Centrelink here.
Leaving the property: If you leave the property within five years for a reason you could have expected, gifting rules apply. Unexpected reasons (e.g., illness, relationship breakdown, or elder abuse) may exempt you. This is a consideration if you anticipate a move into aged care, as it can affect your assessment at that time.
Legal and tax considerations:
Legal and financial advice is essential when creating a granny flat interest, especially to navigate tax, Age Pension, and estate planning implications for everyone involved.
Is it time to make a change?
Deciding whether to upsize, renovate, or create a granny flat is deeply personal. Each option comes with financial and emotional considerations and what’s right for you will depend on your unique circumstances.
Retirement Essentials’ strategy consultations guided by fully qualified and experienced advisers can help you explore your options and consider all Age Pension and superannuation consequences for your key retirement decisions.
What about you?
Have you considered how upsizing or renovating could affect your pension entitlements?
Is your current home still meeting your needs? Have you thought about whether it’s better for you to move or modify your home?
Is living with extended family an option for you?
This article is provided by Retirement Essentials Representative Number: 001260855. We are an authorised representative of SuperEd Pty Ltd ABN 88 118 480 907 AFSL #468859. This information is not intended as financial product advice, legal advice or taxation advice. It does not take into account your personal situation, goals or needs and you should assess your own financial situation, consider if the information is suitable for you and ensure you read the relevant Product Disclosure Statement (PDS) if you choose to make any changes to your financial situation. It is always advisable to consult a financial adviser before making financial decisions.
